Wednesday, October 30, 2002

Are These Stocks Overvalued?

The S&P 500 index has lifted nicely from its 52-week low of 769, set earlier this month. Optimists have interpreted the move as a sign of a market bottom, and they may well be right. But that doesn't mean all stocks are cheap.

Take Weight Watchers International, for example. Since a public offering in mid-November of last year, the stock has been on a tear, rising from $24 to a recent $47. True, Weight Watchers had some good news: Both its earnings and attendance at the company's weight-loss classes have been above expectations. Recent controversy about the extent of America's problems with weight and obesity has also helped the stock.

Still, Weight Watchers looks a bit too pricey. It sells for 36 times expected earnings per share for this year. Contrast that with an estimated annual price-to-earnings ratio of 18 for the S&P 500. And Weight Watcher's price-to-sales ratio (PSR) of 7 isn't exactly reassuring.

Another red flag: For its latest reported quarter, ended June, Weight Watchers' total debt stood at 83% of total assets. That's down from the prior quarter, but still looks ugly next to the 25% average for S&P 500 companies.

Like the other companies in the table, Weight Watchers has good fundamentals and promising growth prospects, but the market may have bid its shares too high in relation to its industry or historical norms.

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